The Insurance industry is experiencing mounting pressures being exerted by sluggish economic growth, ultra-low interest rates, over-capitalisation and, increasingly, by the entrance of leaner start-ups leveraging the unstoppable evolution of technology.
In its recent ABA Report, Aon Benfield reported a drop of 9% in underwriting profit in 2015 across a selection of major Property & Casualty (re)insurers. The Combined Ratio increased to 90.2% and prior year reserve releases comprised 55% of the underwriting profit. Most notable, the Expense Ratio rose by almost 500 bps over the past decade while investment yield declined steadily from 4.4% to 2.7%.
These results reflect a deteriorating operating environment and underwriting margins are undoubtedly becoming thinner. In fact, on a normalised basis and stripping out reserve releases, the combined ratios for many insurers are nearing the break-even point. Despite these challenges, insurers continue to report resilient returns on equity.
It is very possible that large firms are just riding-out the cycle and, having accumulated sufficient capital buffers, feel comfortable with their ability to absorb larger losses when they occur with the hope to see out weaker competitors and hardening rates.
But for now, the pricing floor has not been reached and there is no end in sight for the low interest rates.
Recognising these facts, many insurers emphasise the need to focus on underwriting discipline and technical profitability but very few actually offer clues as to what practical measures they are taking. Capital management (share buy-backs), diversification and innovation have become clichés that many stakeholders find incredible. Considering the fundamental shifts in the business environment, Insurers’ ability to hike their prices is doubtful and the benefits of future reserve releases are declining. The less sexy and more urgent need for greater efficiencies and control of expense ratios is less talked about.
Back-office functions sprinkled across a wide footprint with non-standardised processes supported by fragmented legacy IT eco-systems and data management tools are quite often the main drivers of high operational expenses and significantly constrain insurers ability to improve productivity.
There is no off-the-shelf solution and those hoping for a silver-bullet are set for a huge disappointment.
More than ever, it's imperative Insurance businesses embrace change and capitalise on opportunities without the drag of inefficient processes and practices.
The time to default to tweaking and polishing existing products and processes has passed. Keeping current and at pace with the right technological advances for the business cannot be underestimated.
Failure to instigate change or making ill-advised selections are all potentially very costly options. It is true that some good old practices and traditions can and should be retained and cherished.
Clinging onto all the old ways of doing business is increasingly less likely to form the best on-going strategy for future success as evidenced by recent results and current trends.
To keep the competitive edge, it will be imperative to challenge and re-define the operating models and re-think the ways in which insurance products and services are delivered and how the business portfolio should be optimised and managed bearing in mind what optimisation means will inevitably depend on the particular appetite of individual insurers.
Lotfi Baccouche is the CEO and Co-Founder of Verge 360.
To find out how Verge360 can work with you to address these challenges in your organization please contact us on email@example.com